4th Circuit Revives Case Over Transfers to Cash Balance Plan

The 4th U.S. Circuit Court of Appeals has determined that
participants in Bank of America’s cash balance plan still have a claim for
relief for illegal transfers of their 401(k) account balances to the cash
balance plan.

The appellate court first determined that the plaintiffs had
standing to sue under Employee Retirement Income Security Act (ERISA) Section
502(a)(3), which provides that a plan beneficiary may obtain “appropriate
equitable relief” to redress “any act or practice which violates” ERISA
provisions contained in a certain subchapter of the United States Code. The
court found that the transfers violated ERISA’s anti-cutback provisions, as
determined by the Internal Revenue Service (IRS) during a plan audit, and that
the relief the plaintiffs are seeking—the profits Bank of America made from the
assets transferred—is “appropriate equitable relief.”

The 4th Circuit noted that the U.S. Supreme Court found that
“[a] case becomes moot only when it is impossible for a court to grant any
effectual relief whatever to the prevailing party.” The court said, “If an
accounting ultimately shows that the bank retained no profit, the case may well
then become moot. But as long as the parties have a concrete interest,
however small, in the outcome of the litigation, the case is not moot.”

Finally, the court determined that the statute of
limitations of 10 years under North Carolina trust law applied in the case. The
first of the transfers in question took place in 1998, and the plaintiffs filed
suit in 2004, so their claims are not time-barred by the applicable statute of
limitations.

NEXT: Case background.

In 1998, NationsBank amended its 401(k) plan to give
eligible participants a one-time opportunity to transfer their account balances
to its defined benefit cash balance plan. The cash balance plan allowed
participants to select investment options, but they were purely notional, and participants
were credited with what their accounts would have received if invested in those
options. The bank invested plan assets in investments of its choosing, and if
those investments earned more than the return applied to participants’
accounts, the bank kept the difference.

The plaintiffs filed their lawsuit in 2004, seeking to
obtain the profits the bank was keeping. In 2005, after an audit of the bank’s
plan, the IRS issued a technical advice memorandum, in which it concluded that
the transfers of 401(k) plan participants’ assets to the cash balance plan
between 1998 and 2001 violated Internal Revenue Code § 411(d)(6) and Treasury
Regulation § 1-411(d)-4, Q&A-3(a)(2). According to the IRS, the transfers
impermissibly eliminated the 401(k) plan participants’ “separate account
feature,” meaning that participants were no longer being credited with the
actual gains and losses “generated by funds contributed on the participant[s’]
behalf.”

The IRS determination led a federal district court to move the
participants’ case forward. However, the bank entered into a closing
agreement with the IRS, paying a $10 million fine and setting up a
special-purpose 401(k) plan to restore participants’ accounts. The district
court determined that, following the closing agreement, the participants no
longer had standing to sue.

The appellate court reversed the district court’s decision
and remanded the case for further proceedings.